Liquid funds allow people to put in and take out the money as they please, very much like a savings account, with potential for higher returns due to their characteristic investment in various assets.
This blog views liquid funds vs savings accounts as an investment avenue. Both liquid funds and savings bank accounts seem lucrative, but which of the two delivers more interest and which one is a safer investment? Are liquid funds an alternative for savings accounts, and if yes, what are liquid funds benefits that help alleviate the disadvantages of savings accounts?
A savings account is a basic bank account where you can safely deposit your money and withdraw it as and when you need it. You can withdraw the funds from your savings account using various modes like cheque and ATM cards. The most significant advantage of a savings account is the interest a bank gives to the account holder for keeping their money in the bank. Hence, you can safely store your money and earn an interest on it at the same time without having to commit to a fixed deposit.
Liquid funds come under the category of mutual funds. Liquid funds are categorized as low-risk mutual funds and are market-linked instruments.
Liquid funds are very low risk because they invest in short term assets like commercial paper, certificates of deposit and treasury bills. They mostly choose debt instruments. They might even select some short-term bonds. Liquid funds will typically not invest in stocks and especially not in high-risk stocks. That being said, there is still a risk of interest rates changing, and there is still credit risk in the investments that the fund house makes that result in the returns earned by investors. As such, there is a risk in liquid funds.
This little contest is going to have three rounds
Interest in savings accounts varies between 2.7% and about 4% going up to a maximum of 6% for a senior citizen.
Earnings on liquid funds can be about 6 to 7%, depending on the fund manager’s strategic moves and whether they are able to bring in earnings for the investor’s capital.
You pay tax on your interest linked to your tax slab in a savings account. If you are earning interest over Rs 10,000 from your savings account in a year, the gain will be added to your taxable income. As a result, a tax based on your income tax slab will be levied.
You pay capital gains tax on your earnings through any mutual fund, including liquid funds.
The risk to your savings in your savings account comes from the bank going belly up or hitting some regulatory issues.
In mutual funds, there is a risk of the value of your units falling to less than what you paid for them.
Be wary of anyone who gives you a list of funds to invest in. A mutual fund’s future performance need not be guided by its past performance. Always evaluate funds based on your risk appetite and other factors like what they plan to do with your capital. Of course, a good track record and a reputed asset management company are preliminary filters, but above that, check the fund’s paperwork and plans for your capital when selecting liquid funds for investment.
Also, when you opt for a savings account, you probably don’t slice up your capital fine and then distribute it in different banks. However, it might be advisable to do so with liquid funds because being mutual and market-linked, you might want to manage risk by diversifying your portfolio.
Depending on your risk profile and existing investments, liquid plans might be an excellent way to save capital and attain growth. However, it might be prudent to maintain your savings account and opt for a handful of liquid funds to keep risk at the very minimum. Liquid funds – like all mutual funds – are subject to market risks.